The office of General Counsel issued the following informal opinion on June 27, 2000, representing the position of the New York State Insurance Department.
Re: COBRA Continuation Coverage, Collection of Premium
1. May an insurance broker collect the premium for COBRA continuation coverage on behalf of its employer/clients?
2. Are there any special requirements imposed on the broker?
1. Yes, an insurance broker may provide this service for its client.
2. No, however, the insurance broker will have to comply with all applicable requirements relative to handling of funds.
There were none presented. This was a general inquiry.
The Comprehensive Omnibus Budget Reconciliation Act of 1986 (COBRA), Pub. L. No. 99-272, 100 Stat. 227, required that group health plans provide continuation coverage upon the occurrence of specified qualifying events. This requirement has been codified at 29 U.S.C.A. §1161 et seq. (West 2001).
The required continuation coverage is specified in 29 U.S.C.A. §1162, which provides in pertinent part:
The term continuation coverage means coverage under the plan which meets the following requirements: (1) Type of benefit coverage. The coverage must consist of coverage which, as of the time the coverage is being provided, is identical to the coverage provided under the plan to similarly situated beneficiaries under the plan with respect to whom a qualifying event has not occurred. (3) Premium requirements. The plan may require payment of a premium for any period of continuation coverage, except that such premium--(A) shall not exceed 102 percent of the applicable premium for such period, and (B) may, at the election of the payor, be made in monthly installments.
There is a similar requirement in New York law, New York Insurance §3221(m) (McKinney 2001) (dealing with commercial insurance policies) and New York Insurance Law §4305(e) (McKinney 2001) (dealing with contracts by not-for-profit insurers and Health Maintenance Organizations), which becomes operative when the requirements of COBRA are not applicable.
The right of the employer to require that 102% of the premium be paid to it is to reimburse the employer for the additional costs attendant on processing transactions for the benefit of the former employee. The premium to be paid to the insurer, however, is the same premium as would have been paid for the covered individual, had he or she still been a member of the group as an employee.
There is no prohibition on the employer delegating some of the administrative duties imposed by COBRA. If a firm were to be retained by an employer client to collect the premium for continuation coverage, there is no requirement in the New York Insurance Law that it obtain any separate license. Further, it could retain as its compensation the 2% over and above the premium paid to the insurer.
If an arrangement is entered into between a firm and an employer client for the firm to provide administrative services to the employer, and the firms compensation would be retention of the 2% additional amount, or any part thereof, the requirements of New York Insurance Law §2119(c) (McKinney 2001) would become applicable:
(c) (1) No insurance broker may receive any compensation, other than commissions deductible from premiums on insurance policies or contracts, from any insured or prospective insured for or on account of the negotiation or procurement of, or other services in connection with, any contract of insurance made or negotiated in this state or for any other services on account of such insurance policies or contracts unless such compensation is based upon a written memorandum, signed by the party to be charged, and specifying or clearly defining the amount or extent of such compensation.
(2) A copy of every such memorandum shall be retained by the broker for not less than three years after such services have been fully performed.
New York Insurance Law §2120(a) (McKinney 2001), dealing with the fiduciary obligations of insurance brokers, provides:
Every insurance broker acting as such in this state shall be responsible in a fiduciary capacity for all funds received or collected as insurance broker, and shall not, without the express consent of his or its principal, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity.
The Regulations of this Department, N.Y. Comp. R. & Regs. tit. 11, §20.3(c), further provide:
Except as hereinabove provided, an broker shall not commingle any funds received or collected as broker with his or its own funds or with funds held by him or it in any other capacity without the written consent of the person, firm or corporation for whom they are held in a fiduciary capacity.
Accordingly, if an insurance broker wishes to retain the 2%, it will have to obtain the written authorization of its employer client. In addition, the broker will have to maintain the funds collected in a separate bank account.
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.